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Knowing How to Choose Between Bankruptcy Chapters 7, 11, and 13.

Knowing How to Choose Between Bankruptcy Chapters 7, 11, and 13.

Even a trained lawyer who decides to represent him or herself in a legal matter is deemed a “fool.” Likewise, no reasonable person should choose to navigate the turbulent waters of bankruptcy without trusted representation from an attorney who knows the ins and outs of bankruptcy learned from working in those waters each and every day. Bankruptcy can be quite confusing without proper guidance. That said, we thought we’d spend a moment exploring the differences between the three types of bankruptcy that most would be eligible to consider, i.e. Chapter 7, Chapter 11, and Chapter 13.

Chapter 7

Chapter 7 bankruptcy is the most cut and dry filing. It is often referred to, as “straight” bankruptcy. The debtor who files Chapter 7 is seeking to quickly eliminate their unsecured debts and is willing to expose their assets to the bankruptcy process and possible sale by the Chapter 7 trustee, to the extent those assets are not protected by secured debt, or statutory exemptions.

Unsecured debts can include personal loans, credit cards, medical bills, utility bills, and other monies owed that have no collateral attached to the loan. Unsecured debt is volatile and high risk for the creditor due to the very fact that the debts incurred have no collateral associated with them, giving the obligor less motive to make voluntary payments when things get tight, and the holder less leverage to extract payment in the same circumstances.

If you are experiencing financial distress you will find solace in knowing that both state and federal law provide protection regarding much, if not all, of your property, should you seek bankruptcy protection. We will be happy to discuss with you the many items of your personal property that will be exempt from process in your bankruptcy case. Chapter 7 bankruptcy is distinguished from both of the other commonly available individual chapter filings because it does not require a repayment plan, paid over a term of years. The debtor obtains a discharge of their debts (referred to as a “fresh start”) in the vast majority of cases within 90 to 120 days of filing their Chapter 7 case.

With limited exceptions, any person, who resides or is domiciled in the United States is eligible for Chapter 7 bankruptcy relief. The word “person” includes an individual, partnership, and corporation, in the bankruptcy context. A realty trust is not considered a person for bankruptcy purposes.

A Chapter 7 filing can bring great relief and a “fresh start” to the well represented and informed debtor. For a Chapter 7 filing to yield this positive result the debtor must participate in all aspects of case preparation and cooperate with counsel in all legal proceedings during administration of the case. Again, having proper legal representation is imperative. We are here to help you through the entire process.

Chapter 11

Though individuals and small businesses are eligible to seek bankruptcy protection under Chapter 11, it is generally used by larger companies, due to the complexity and expense of a Chapter 11 filing. A Chapter 11 bankruptcy filing enables the debtor to restructure debts by means of a Chapter 11 plan of reorganization which can provide for discharge of certain debts, partial payment of others, and adjustment to the required payment terms of still others, giving the debtor a necessary respite to reorganize their affairs and survive to work another day.

A recognized benefit of the Chapter 11 process is that it allows the debtor to remain open for business while working to pay the debts owed to their creditors. This provides a benefit to the debtor, its employees and customers, as well as its creditors.

When the person filing for Chapter 11 relief, be it a business or, (less often) an individual begins to formulate their unique plan of reorganization, they do so with an eye toward prioritizing and characterizing their debts into separate categories for repayment purposes. Secured claims will be treated differently (and better) than unsecured claims. Tax claims will be treated differently (and better) than typical costs of doing business. The debtor is allowed to make an effort to pay immediate pressing obligations while extending or discharging less essential claims. This must be done in a manner which respects the requirements of Chapter 11, especially as relates to fairness and equity to creditors.

While any size enterprise is eligible to seek Chapter 11 protection, smaller businesses and individuals are much more likely to experience difficulty withstanding the demands and expense of life in Chapter 11. The 2005 Amendments to the Bankruptcy Code developed a definition of a “small business debtor” which, if one qualifies, is intended to simplify and make less expensive the Chapter 11 process, for the small business debtor. While it is fair to say that the bigger the debtor, the greater the chance at reorganizing successfully in Chapter 11, it is even more important to note that obtaining the assistance of a knowledgeable and seasoned bankruptcy attorney to provide direction and counsel through this difficult process is an even greater factor in the results which you can achieve. At Shaines & McEachern we analyze each case on its own merits and will provide you honest direction as to the path which will lead you to your best result.

Chapter 13

The goal of a Chapter 13 bankruptcy is, to eliminate the debtor’s burdensome debt structure, while requiring a period of repayment, generally between three and five years, to address as much of that debt as the debtor can actually afford. Unlike Chapters 7 and 11, Chapter 13 requires that the debtor be an individual (a person) and possess “regular and stable income.” Thus, corporations and partnerships are not eligible to seek protection under Chapter 13.

A Chapter 13 bankruptcy is often filed in situations where the debtor has experienced a period of unemployment or sickness which resulted in sizable arrearages on their home mortgage, automobile loans, or other secured debts. If those creditors are not willing to work with the debtor to get the payments back on track, Chapter 13 allows the debtor to do so without having to ask the creditor for any indulgence. It suffices to say that Chapter 13 is a most effective tool for the consumer who has weathered difficult circumstances and needs some assistance keeping creditors at bay while getting their debt situation back under control.

For the debtor faced with unsecured debts such as: medical bills, credit cards, personal loans, and similar obligations, Chapter 7 is the preferred means to debt resolution. For the debtor who is in arrears on their secured debt obligations (such as home mortgage or auto loan) Chapter 13 is the better option. A bankruptcy attorney can help direct you to the decision which is in your best interest.

In the end, the decision of whether to file bankruptcy and what Chapter to employ can be complicated. Rather than muddle through on your own, hire an attorney that will listen to your situation and go to work for you. We at Shaines & McEachern realize that nobody wants to file bankruptcy, but, when circumstances require you to consider all options and you need a helping hand to move forward and start anew, look to us to help you turn the page.

If you would like more information or to schedule a consultation with Peter contact us today.